The opinion
T.C. Memo. 2002-186
UNITED STATES TAX COURT
ESTATE OF FRANCES C. GLOVER, a.k.a. FRANCES C. CLOUD, DECEASED,
KEVIN HOLLERAN AND WILMINGTON TRUST COMPANY,
ADMINISTRATORS PRO TEM, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9054-95. Filed August 2, 2002.
Mark L. Tunnell, for petitioner.
Gerald A. Thorpe, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Pursuant to a statutory notice of deficiency
dated March 2, 1995, respondent determined a $698,191 deficiency in
the estate tax of the Estate of Frances C. Glover (hereinafter,
Frances C. Glover is referred to as decedent and her estate as
decedent’s estate). On April 21, 1999, the Court granted
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respondent’s motion for leave to file amendment to answer and to
claim increased deficiency asserting an increased deficiency in
estate tax of $2,235,455.49.
In the amendment to answer, respondent raised as an issue
whether a potential malpractice claim decedent possessed against
the law firm of Eckell, Sparks, Monte, Auerback & Moses (Eckell,
Sparks) constituted an interest in property includable in
decedent’s gross estate, and if so, the value of that claim. As
detailed infra, on March 13, 1995 (more than 4 years after
decedent’s death), the administrators pro tem. and the residuary
beneficiaries of decedent’s estate filed an action against Eckell,
Sparks. The plaintiffs’ claims in that action included, among
others, a claim related to malpractice committed in handling
decedent’s affairs during her life and a claim for a return of
attorney’s fees of $247,500 paid by the estate for services
rendered during the administration of the estate. In April 2000,
the Court of Common Pleas of Chester County, Pennsylvania, Orphans’
Court Division (the Orphans’ Court) ordered Eckell, Sparks to
return the $247,500 of attorney’s fees paid by the estate. In
early May 2000, the administrators pro tem., the Glovers, and
Eckell, Sparks entered into a settlement agreement, pursuant to
which Eckell, Sparks agreed to pay the administrators pro tem. and
the residuary beneficiaries $750,000 for the release of all their
claims against the law firm.
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The parties filed a stipulation of settled issues with this
Court in which they were able to resolve most of their
differences.1 In addition, in the stipulation of settled issues,
1
Pursuant to the stipulation of settled issues, the
parties agreed to the following settlement terms:
a. The value of Folly Hill Farm reported on the estate tax
return should be reduced by $77,447 to reflect the cost
of an environmental cleanup;
b. The value of the Woolworth stock reported on the estate
tax return should be increased by $86,941;
c. The taxable estate reported on the estate tax return
should be increased by $5,000 to reflect a general
power of appointment decedent held in the Frances G.C.
Glover Trust on the date of death;
d. The taxable estate reported on the estate tax return
should be increased by $48,500 to reflect the value of
a claim decedent had against Madelyn M. Hurley on the
date of death;
e. The taxable estate reported on the estate tax return
should be increased by $20,021 to reflect the value of
a claim decedent had against Charles W. Hurley on the
date of death;
f. The taxable estate reported on the estate tax return
should be increased by $133,712 to reflect a Federal
income tax refund for 1990 to which decedent was
entitled on the date of death;
g. Decedent’s estate will be allowed a deduction for
administrator’s commissions and other miscellaneous
administrative expenses paid by decedent’s estate to
the extent approved by a final order of the Court of
Common Pleas of Chester County, Pennsylvania, Orphans’
Court Division (the Orphans’ Court).
h. Decedent’s estate will be allowed a deduction for
attorney’s fees paid by decedent’s estate (excluding
attorney’s fees paid to attorneys representing the
(continued...)
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decedent’s estate and respondent agreed to use the $750,000
settlement amount as “the starting point” for determining the value
of decedent’s interest in the malpractice claim against Eckell,
Sparks. The parties further agreed (1) to reduce the $750,000
settlement proceeds by $203,659, representing the legal costs
incurred in prosecuting the malpractice claim, (2) that decedent’s
estate had the “right to argue” that the $750,000 figure should be
further reduced (a) by $247,0002 representing the claim the estate
asserted for the return of attorney’s fees and (b) for an
additional portion of the amount recovered from Eckell, Sparks
“because it is property belonging to the residuary beneficiaries
(the Glovers) and is not property of the estate”, and (3) that the
net value of decedent’s interest in the malpractice claim at the
date of settlement (after all allowable reductions) should be
multiplied by 0.438233 to arrive at its present value as of the
date of decedent’s death.
1
(...continued)
residuary beneficiaries and payment to one of the
residuary beneficiaries, the deductibility of such fees
and payments are at issue in this case) to the extent
approved by a final order of the Orphans’ Court.
i. Decedent’s estate should be allowed a deduction, not to
exceed $1 million, for a charitable bequest to the
University of Pennsylvania to the extent paid.
2
The actual amount of attorney’s fees ordered returned
was $247,500.
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The issues remaining3 for us to decide are as follows:
1. Whether any portion of the $750,000 settlement Eckell,
Sparks paid to the administrators pro tem. and the residuary
beneficiaries of decedent’s estate (the Glovers) should be
allocated to (a) the value of the estate’s claim for the $247,500
of legal fees that the Orphans’ Court ordered Eckell, Sparks to
return to decedent’s estate and/or (b) to the value of the claims
the Glovers made against Eckell, Sparks, with the consequences that
the amount of any such allocation is not included in the value of
decedent’s claim against Eckell, Sparks on the date of her death.
2. If we determine that no portion of the $750,000
settlement is allocable to the Glovers’ claims, then whether that
portion (60 percent) of the $750,000 Eckell, Sparks settlement that
was distributed to the Glovers is a deductible expense in
determining decedent’s taxable estate.
3
In its answering brief, decedent’s estate:
a. Conceded that attorney’s fees of $247,500 paid to
the law firm of Eckell, Sparks, Monte, Auerback & Moses
that the Orphans’ Court ordered be returned to
decedent’s estate are not deductible as administrative
expenses pursuant to sec. 2053(a)(2).
b. Failed to address and, therefore, is deemed to
have conceded that commission of $250,000 paid to
Madelyn M. Hurley, the original executrix of decedent’s
estate, is not deductible as an administrative expense
pursuant to sec. 2053(a)(2) nor deductible as a theft
loss pursuant to sec. 2054.
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3. Whether payments made by decedent’s estate to attorneys
representing the Glovers, and payments, if any, to be made to Mr.
Glover (one of the residuary beneficiaries) for time and money
spent in discovering the misappropriation of decedent’s assets by
Ms. Hurley and Mr. Ross (persons to whom decedent entrusted all of
her financial affairs) are deductible either as administrative
expenses (pursuant to section 2053(a)(2)) or as claims against the
estate (pursuant to section 2053(a)(3)) in determining decedent’s
taxable estate.4
FINDINGS OF FACT
Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and the exhibits submitted
therewith are incorporated herein by this reference.
Background
On the date of her death, June 3, 1991, decedent resided in
Pennsylvania. Kevin Holleran and the Wilmington Trust Co. were
duly appointed coadministrators pro tem. of decedent’s estate. At
the time the petition in this case was filed, Mr. Holleran resided
in Pennsylvania, and the principal place of business of Wilmington
Trust Co. was in Delaware.
4
All section references are to the Internal Revenue Code
as amended and in effect on the date of decedent’s death, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Decedent
Decedent inherited substantial wealth from her parents and a
great uncle. Her lifestyle was not lavish; she lived comfortably
on the income and dividends from her investments.
At an unspecified date in the early 1960s, decedent met
Madelyn Hurley (also known as Lynn Hurley); they thereafter
developed a close friendship. Initially, Ms. Hurley began helping
decedent by performing secretarial and administrative chores (such
as sorting mail, paying bills, and depositing checks); she was not
compensated for these services. At an unspecified date in early
1980, decedent engaged Richard Ross to serve as her financial
adviser. Thereafter, Mr. Ross and Ms. Hurley worked together, and
decedent began compensating Ms. Hurley for her services.
On June 4, 1984, decedent suffered a stroke that left her
partially paralyzed. After the stroke, decedent entrusted all of
her financial affairs to Mr. Ross and Ms. Hurley. At that time,
decedent’s assets, which consisted primarily of real estate,
stocks, and bonds, were worth more than $13 million.
Mr. Ross and Ms. Hurley opened three checking accounts into
which they deposited decedent’s funds and over which they had
signature authority. Mr. Ross and Ms. Hurley also held powers of
attorney that allowed them to conduct transactions through
decedent’s brokerage accounts.
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At an unspecified date in 1987, Mr. Ross (until his death in
1989) and Ms. Hurley began to misappropriate decedent’s funds. By
the date of decedent’s death in 1991, they had misappropriated
approximately $1.6 million. Mr. Ross and Ms. Hurley used these
funds to pay their personal expenses and to invest in business
ventures. They retained Eckell, Sparks to represent them in some
of these business ventures.
Decedent’s Will
In June 1989, Mr. Ross and Ms. Hurley engaged Eckell, Sparks
to draft a new will (the 1989 will) for decedent. Before this
time, Eckell, Sparks had not performed legal services for decedent.
Eckell, Sparks did not send decedent an “engagement letter”
acknowledging their representation of her or specifying the fee
arrangement. Nor did any attorney from Eckell, Sparks meet or
communicate with decedent. Rather, in preparing the 1989 will for
decedent, Joseph Monte of Eckell, Sparks used decedent’s prior will
(the old will), which was provided by Mr. Ross and Ms. Hurley, and
relied upon information provided by Mr. Ross and Ms. Hurley.
Decedent had a longtime companion, Edward H. Cloud, whom she
married on June 13, 1990. She also had one brother, Rolfe E.
Glover III, who had three children, Rolfe E. Glover IV, Gordon F.
Glover, and Katherine C. Glover. (Reference to Mr. Glover is to
Rolfe E. Glover IV, and reference to the Glovers is to the three
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children.) The Glovers were the residuary beneficiaries under the
old will as well as the 1989 will.
The 1989 will provided for certain specific bequests,
including a bequest of $50,000 to Mr. Ross and a bequest of $1
million to the University of Pennsylvania.5
Decedent owned a mobile home (valued at approximately
$250,000) which was to be held in trust and rented for $1 per year
to Mr. Cloud for so long as he desired. She also owned a farm
residence (known as Folly Hill) which was to be held in trust for
the benefit of Mr. Cloud, giving him the right to occupy the farm
rent free for life. Upon Mr. Cloud’s death, the farm went to a
residuary trust for the benefit of the Glovers.
The 1989 will created a residuary trust, from which the
trustee was to pay so much of the income and principal as necessary
to pay Mr. Cloud’s living expenses during his life. Upon Mr.
Cloud’s death, the assets of the residuary trust, including the
farm, were to be distributed to the Glovers.
Mr. Ross was named as the executor/trustee of the 1989 will.
Ms. Hurley was named as the contingent executrix/trustee in the
event Mr. Ross failed to qualify or ceased to act.
5
The bequest was to establish and perpetuate the Frances
Cheney Glover Endowment Fund to be used for the support of
academic development of veterinary staff and teaching of
veterinary students.
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Mr. Ross and Ms. Hurley delivered the 1989 will to decedent.
Ms. Hurley penned the following interlineations on the will: Ms.
Hurley was to receive a $50,000 bequest, and Mr. Cloud’s nieces and
nephew (the Pierces), rather than the Glovers, were to receive the
farm upon Mr. Cloud’s death. After initialing the aforementioned
interlineations, decedent signed the will on June 29, 1989.
Present at that time were Mr. Cloud, Mr. Ross, Ms. Hurley, and
Jayne Kirkpatrick (a friend of decedent). The signed will was then
taken by Mr. Ross and Ms. Hurley to Ms. Hurley’s home where Ms.
Hurley’s mother (Nell Meding) and Ms. Hurley’s secretary (Karen
Benner) signed the 1989 will as witnesses. Upon obtaining these
signatures, Mr. Ross and Ms. Hurley delivered the executed 1989
will to Eckell, Sparks, where the signatures were improperly
notarized. The 1989 will was then placed in a safe at the office
of Eckell, Sparks. Subsequently, Eckell, Sparks sent the original
and a copy of the 1989 will to Ms. Hurley where they remained until
decedent’s death.
On August 24, 1989, Mr. Ross died. Ms. Hurley was the
executrix and sole beneficiary of Mr. Ross’s estate.
Antenuptial Agreement
In early 1990, decedent and Mr. Cloud decided to marry. On
May 17, 1990, Ms. Hurley retained Eckell, Sparks to draft an
antenuptial agreement for decedent and Mr. Cloud. The antenuptial
agreement provided that decedent would leave Mr. Cloud a cash
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bequest of $2 million in her will. Eckell, Sparks mailed the
antenuptial agreement to Ms. Hurley. Eckell, Sparks did not
recommend to decedent that, before the execution of the antenuptial
agreement, she or independent counsel consult with her accountant,
George Skinner, to obtain a statement of her assets. On May 22,
1990, decedent and Mr. Cloud executed the antenuptial agreement.
Ms. Hurley kept the executed antenuptial agreement until she sent
it to Eckell, Sparks in the spring of 1991.
Revised Will
On April 2, 1991, Ms. Hurley met with a member of Eckell,
Sparks to discuss the revision of decedent’s will. The revised
will was to include the $2 million bequest to Mr. Cloud, reduce the
bequest to the University of Pennsylvania to $250,000, and
eliminate the $50,000 bequest to Ms. Hurley. The revised will was
sent to Ms. Hurley on April 2, 1991. Ms. Hurley, however, never
gave the revised will to decedent to execute.
Decedent died on June 3, 1991.
Decedent’s Estate
All of the beneficiaries under the 1989 will, except Mr. Ross,
were alive when decedent died. Since decedent’s death, Mr. Cloud
and Ms. Kirkpatrick have died.
On June 7, 1991, Ms. Hurley submitted the 1989 will to the
Register of Wills of Chester County, Pennsylvania (register of
wills) for probate. The register of wills admitted the 1989 will
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(with the interlineations) to probate and granted Letters
Testamentary to Ms. Hurley.
Ms. Hurley engaged Eckell, Sparks to represent her as
executrix for the estate. Soon thereafter, Mr. Cloud filed a
petition with the Orphans’ Court, seeking to enforce the
antenuptial agreement. Without opposition, the antenuptial
agreement was upheld by the Orphans’ Court.
Decedent’s Income Tax Returns
Shortly after decedent’s death, Eckell, Sparks learned that
decedent had not filed income tax returns for the 4 years preceding
her death. In August 1991, Eckell, Sparks obtained from decedent’s
accountant, Mr. Skinner, his files relating to decedent’s affairs.
Those files revealed that Mr. Skinner (1) had filed with the
Internal Revenue Service requests for extensions of time for filing
decedent’s tax returns, (2) had partially prepared tax returns for
the years in question, based upon information available to him from
the preparation and filing of previous tax returns for decedent
(and before Mr. Ross and Ms. Hurley took over as financial
advisers), (3) had over the 4-year period asked Mr. Ross and Ms.
Hurley for information needed to complete the tax returns, and (4)
was unable to document decedent’s assets or liabilities and
resulting net worth because the information was not available to
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him. Mr. Skinner informed Eckell, Sparks that Mr. Ross and Ms.
Hurley, as decedent’s financial advisers, were responsible for the
failure to file decedent’s tax returns.
Contested Will
On June 9, 1992, the Glovers, through their attorneys, Lamb,
Windle & McErlane (Lamb, Windle), filed an appeal to the Orphans’
Court, challenging the probate of the 1989 will. The Glovers
claimed that, after decedent executed the 1989 will on June 29,
1989, the will had been altered by undated handwritten
interlineations and cancellations but had not been republished or
properly reexecuted by decedent.
After a hearing on the matter, the Orphans’ Court held that
the register of wills had incorrectly decided that the 1989 will
had been properly attested to and notarized. On November 5, 1992,
the Orphans’ Court entered a decree vacating the June 7, 1991,
probate of the 1989 will and remanding the matter to the register
of wills.
On December 2, 1992, the Glovers filed a caveat with the
register of wills, claiming that the 1989 will was invalid for the
following reasons:
1. Execution of the document was obtained by undue
influence exerted by A. Richard Ross and Lynn Hurley and
others who were in a confidential relationship with
decedent;
2. Lynn Hurley is unfit to be entrusted with the
administration of the estate * * * because of her failure
to perform the duties entrusted to her by decedent and
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mismanagement of decedent’s affairs, all of which
resulted in financial loss to decedent, placing Ms.
Hurley in a conflict of interest with the estate of
decedent, which estate has a cause of action against Ms.
Hurley for these breaches of duty and losses; * * *
The register of wills granted nonsuit against the Glovers and
denied and dismissed the caveat. On February 1, 1993, the register
of wills again admitted the 1989 will to probate and granted
letters testamentary to Ms. Hurley.
On April 29, 1993, the Glovers filed a petition with the
Orphans’ Court seeking the removal of Ms. Hurley as executrix and
the appointment of the Glovers as coexecutors of the will. In
addition, the petition requested that Ms. Hurley (1) forfeit her
executrix’s commission, (2) be prohibited from transferring any of
her personal assets outside of the ordinary course of her daily
life without the permission of the court, and (3) be required to
file with the court a schedule listing (a) all of her personal
assets, (b) all transfers from the estate to her, Mr. Ross, and
several entities in which they together had an interest, and (c)
any outstanding loans from decedent’s or the estate’s accounts made
during the relevant period.
In the petition, the Glovers asserted that they had examined
several of decedent’s bank and brokerage accounts that were
controlled by Ms. Hurley and Mr. Ross and that their examination
revealed that large sums of money deposited into those accounts had
been used for the personal benefit of Ms. Hurley and Mr. Ross. The
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Glovers maintained that, even if those transfers were treated as
loans (as Ms. Hurley contended), Ms. Hurley, as executrix of the
estate, had a conflict of interest because she had made no attempt
to recoup the funds she took from decedent’s accounts. Moreover,
the Glovers alleged that Ms. Hurley had actively and fraudulently
attempted to conceal the indebtedness in order to further her own
interests.
On May 3, 1993, the Orphans’ Court entered a preliminary
decree directing Ms. Hurley to show cause why she should not be
removed as executrix of decedent’s estate. The court also issued
a temporary restraining order against Ms. Hurley, enjoining her
from (1) participating in all decisions regarding the
administration of the estate, (2) participating in all decisions
regarding the assets of the estate, (3) engaging or paying counsel
to represent the estate, (4) claiming any compensation as
executrix, (5) doing any other act as executrix, and (6)
transferring any of her personal assets outside the ordinary course
of her daily life without permission of the court. The restraining
order required Ms. Hurley to file with the court a schedule listing
all of her personal assets and an accounting of all transfers of
money or property from decedent’s bank accounts or from the estate
during the relevant periods.
On June 22, 1993, the Orphans’ Court entered a decree removing
Ms. Hurley as executrix and appointing Kevin Holleran (an attorney
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specializing in estate administration) and the Wilmington Trust Co.
as administrators pro tem. Before Ms. Hurley was removed as
executrix, she paid herself an executrix’s commission of $250,000
and a legacy of $50,000. In addition, she paid attorney’s fees
totaling $247,500 to Eckell, Sparks.
After being appointed by the Orphans’ Court, Mr. Holleran
conferred with Mr. Glover and the Glovers’ attorneys at the offices
of Lamb, Windle. Mr. Holleran reviewed Lamb, Windle files relating
to decedent’s affairs. The Lamb, Windle files revealed that most
of decedent’s records had been destroyed shortly after her death.
Mr. Glover expended time and money investigating decedent’s
estate. He subpoenaed and obtained records from the financial
institutions with which decedent dealt. The records were
voluminous. There were pages of photocopies of checks and
statements, diagrams, and charts. It took approximately 1-1/2
years from the date of decedent’s death to put together the
evidence which was the foundation of the Glovers’ petition to have
Ms. Hurley removed. Mr. Holleran believed that the estate
benefited significantly from the information Mr. Glover gathered
through the discovery process in the actions brought by the Glovers
to contest the will and to remove Ms. Hurley.
On July 30, 1993, the administrators pro tem. filed a civil
action against Ms. Hurley in the Court of Common Pleas, Chester
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County, Pennsylvania (the court of common pleas), seeking damages
for fraudulent conversion (count I), unjust enrichment (count II),
and breach of fiduciary duty (count III). The complaint alleged
that Ms. Hurley and Mr. Ross misappropriated up to $2.5 million
from decedent.
On October 6, 1993, the Glovers filed a petition with the
Orphans’ Court appealing the decision of the register of wills to
probate the 1989 will. The Glovers argued that the 1989 will
should not have been probated for the following reasons: (1) Ms.
Hurley and Mr. Ross fraudulently induced decedent to sign the will;
(2) Ms. Hurley and Mr. Ross exercised undue influence over decedent
in connection with the will; (3) because of decedent’s physical and
mental state, decedent did not have the capacity to understand the
provisions of the will; and (4) decedent was unaware of several
significant facts (namely, the misappropriation by Ms. Hurley and
Mr. Ross) which would have changed the dispositions decedent made
in her will.
The civil action filed by the administrators pro tem. and the
Glovers’ appeal were consolidated for trial and opinion in the
Orphans’ Court Division of the court of common pleas on November
19, 1993.
On April 5, 1994, Ms. Hurley filed her account of the estate
with the Orphans’ Court. On April 6, 1994, the administrators pro
tem. filed objections to Ms. Hurley’s account. The administrators
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pro tem., among other things, objected to Ms. Hurley’s executrix’s
commission ($250,000) and the attorney’s fees paid to Eckell,
Sparks ($247,500). Further, they requested that Ms. Hurley and
Eckell, Sparks be surcharged for the $125,000 they alleged Mr.
Glover spent on attorney’s fees while uncovering the acts of
concealment, obstruction, and malfeasance by Ms. Hurley and Eckell,
Sparks. A hearing on the objections was deferred pending the
outcome of the civil action.
On November 2, 1994, the Orphans’ Court issued an opinion and
decree nisi dismissing the Glovers’ appeal. The opinion concluded
(1) that decedent was of a sound mind and possessed testamentary
capacity at the time of the execution of the 1989 will, and (2)
that the 1989 will was not the result of undue influence or fraud.
Consequently, the court found that the 1989 will was valid and
properly admitted to probate. However, the Orphans’ Court entered
a judgment against Ms. Hurley and in favor of the administrators
pro tem. for $1,383,603.32 ($1,058,603.32 for restitution to
decedent’s estate for breach of fiduciary duty owed, and $325,000
for interest on income tax and tax penalties, as a consequence of
her failure to turn over information to decedent’s accountant
needed to file timely tax returns and to make tax payments).
On November 15, 1994, the Glovers filed exceptions to the
Orphans’ Court’s decree, requesting that the court change and/or
modify its decree to find (1) that the 1989 will was invalid for
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lack of due execution (i.e., it was a product of fraud, undue
influence, and lack of capacity); (2) that the interlineations were
invalid for lack of due execution; (3) that all fiduciary and
beneficial provisions in favor of Ms. Hurley were invalid and
should be stricken; and (4) that the appeal from probate be
sustained.
On February 9, 1995, the en banc court of common pleas of
Chester, County, Pennsylvania, Orphans’ Court Division, entered an
opinion and order (the en banc court decision) rejecting the
arguments made in the exceptions filed by the Glovers and made its
decree final, upholding the validity of the 1989 will by decedent.6
On March 6, 1995, the Glovers appealed the en banc court
decision to the Superior Court of Pennsylvania. On January 11,
1996, the superior court filed its judgment, In re Estate of
Glover, 669 A.2d 1011 (Pa. Super. Ct. 1996), affirming in part and
reversing in part the en banc court decision. The superior court
sustained the en banc court decision that the 1989 will was valid;
however, it reversed the Orphans’ Court’s determination with
6
On Dec. 9, 1994, Ms. Hurley filed a petition for relief
under ch. 11 with the U.S. Bankruptcy Court for the Eastern
District of Pennsylvania. The administrators pro tem. filed a
motion to dismiss pursuant to 11 U.S.C. sec. 1112(b) against Ms.
Hurley citing “bad faith”. After 5 months of litigation, the
bankruptcy court dismissed Ms. Hurley’s case “for cause” under 11
U.S.C. sec. 1112(b). Ms. Hurley appealed that decision to the
U.S. District Court for the Eastern District of Pennsylvania, but
in June 1995, she withdrew her appeal.
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respect to the validity of the $50,000 legacy to Ms. Hurley,
finding that the legacy was induced by fraud.7
On April 17, 1996, the administrators pro tem. and Ms. Hurley
entered into a settlement agreement which disposed of all claims
possessed by the estate for acts committed by Ms. Hurley on or
before June 1, 1989.
On March 26, 1999, the Orphans’ Court entered an opinion and
decree dismissing the renewed objections filed by the
administrators pro tem. with respect to Ms. Hurley’s account of the
estate on the ground that those objections were disposed of in the
prior proceeding and thus barred under the doctrine of res
judicata. The administrators pro tem. then asked the superior
court for permission to appeal the Orphans’ Court’s dismissal of
their renewed objections to Ms. Hurley’s first and final account.
Their request was denied on June 15, 1999.
Suit Against Eckell, Sparks
On March 13, 1995, the administrators pro tem. and the Glovers
(referred to collectively as the plaintiffs) filed an action in the
court of commons pleas against Eckell, Sparks seeking damages for
the actions and conduct of the law firm over the 4-year period from
June of 1989 to June of 1993. The plaintiffs retained the law firm
7
On Feb. 6, 1996, the Glovers filed a petition for
allowance of appeal with the Supreme Court of Pennsylvania,
appealing the superior court’s Jan. 11, 1996, judgment. On Jan.
16, 1997, the Supreme Court denied the Glovers’ appeal.
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of Fell & Spaulding to represent them in the action on a
contingency-fee basis. In their complaint, the plaintiffs sought
(1) compensatory damages in the sum of $3.7 million, together with
interest and costs for malpractice committed by Eckell, Sparks in
connection with the drafting of the 1989 will and the antenuptial
agreement (count I); (2) the sum of $340,270, together with
interest and costs for attorney’s fees incurred by the Glovers in
contesting the 1989 will (count II); (3) compensatory damages in
the form of reimbursement of the executrix’s commissions, bequests
to Ms. Hurley, and Eckell, Sparks’s attorney’s fees in the amount
of $547,500, together with interest and costs for malpractice
committed by Eckell, Sparks while representing decedent’s estate
(count III); (4) $857,000, together with treble damages, costs, and
reasonable attorney’s fees, for conduct by Eckell, Sparks that
violated the Federal Racketeer Influenced and Corrupt Organizations
Act (RICO) (count IV); and (5) punitive damages, alleging that
Eckell, Sparks’s conduct was “outrageous” and amounted to a “gross
and reckless disregard of the probable consequences and the harm
being inflicted on the Plaintiffs herein” (count V).
On August 8, 1995, the Glovers and the administrators pro tem.
entered into an agreement to provide a method for allocating any
amount recovered from the lawsuit against Eckell, Sparks, as well
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as for allocating expenses in prosecuting the lawsuit.8 The
parties agreed that the Glovers would receive 60 percent of any
recovery and would be responsible for 60 percent of the litigation
expenses. The estate would receive the remaining 40 percent of any
recovery and would be responsible for 40 percent of the litigation
expenses.
On November 8, 1995, the court of common pleas entered an
order: (1) Dismissing count I relating to the predeath malpractice
claim, finding that (a) the complaint contained insufficient facts
to establish that Eckell, Sparks played a role in wrongdoings
committed by Mr. Ross and Ms. Hurley, and (b) the Glovers lacked
standing to assert the predeath malpractice claim set forth in
count I of the complaint; (2) dismissing count II, with prejudice,
relating to the recovery of the attorney’s fees the Glovers
incurred in the will contest, finding that the Glovers lacked
standing to assert the claim and that such a claim could not be
asserted separately but rather was a component of the damages
asserted in the main action (i.e., part of the damages resulting
from Eckell, Sparks’s malpractice); (3) dismissing count III
relating to the postdeath negligence claim, finding there were
insufficient facts to establish negligence on the part of Eckell,
8
The agreement recites that the plaintiffs recognized
that it would be extremely difficult to accurately and precisely
allocate between the interests of the Glovers and the estate any
moneys received by way of either a jury verdict or settlement in
the lawsuit pending.
- 23 -
Sparks9 and that the Glovers lacked standing to assert a claim for
any malpractice that Eckell, Sparks may have committed while
handling matters for the estate; (4) dismissing with prejudice
count IV, finding that the administrators pro tem. lacked standing
since they did not allege conduct covered by RICO, and that the
Glovers lacked standing to bring such an action under RICO against
Eckell, Sparks; and (5) dismissing with prejudice count V, finding
that a claim for punitive damages was not a separate cause of
action and that the plaintiffs had not alleged sufficient facts to
support their assertion that Eckell, Sparks’s conduct was
“outrageous”. The plaintiffs appealed to the superior court.
The superior court affirmed the order of the lower court
except with regard to the dismissal of the predeath malpractice
claim by the administrators pro tem. against Eckell, Sparks. The
superior court reversed and remanded the case for consideration of
that claim.
On April 17, 2000, the Orphans’ Court, sua sponte, raised the
issue of the reasonableness of the compensation paid by the estate
to Ms. Hurley and Eckell, Sparks. The Orphans’ Court entered an
opinion and decree requiring Ms. Hurley and Eckell, Sparks to repay
the amounts they had received from decedent’s estate.
9
The court, however, granted the administrators pro tem.
additional time to file an amended complaint to state adequate
facts establishing breach of duty and causation in count III.
- 24 -
On April 24, 2000, a trial of the Eckell, Sparks case
commenced in the court of common pleas. In early May 2000 the
administrators pro tem., the Glovers, and Eckell, Sparks entered
into a settlement whereby Eckell, Sparks agreed to pay $750,000 for
the release of all claims asserted in both the civil action and the
will contest. Total litigation costs of $203,659 were incurred in
the action, resulting in a net recovery of $546,341.
Attorney’s Fees in Litigation of Decedent’s Estate
The law firm of Lamb, Windle represented the Glovers with
respect to matters relating to decedent’s estate. Lamb, Windle
billed the Glovers $269,206; the estate paid the bill. Of the
amount paid, $91,192 was for services performed before the
administrators pro tem. were appointed, and $178,014 was for
services performed after that appointment.
The law firm of Gawthrop, Greenwood & Halsted represented the
administrators pro tem. on the matters regarding Ms. Hurley and
Eckell, Sparks. A letter dated August 28, 2000, reflects
attorney’s fees of $206,024.27 related to the Hurley matter and
$18,205.50 related to the Eckell, Sparks matter.
Mr. Glover was actively involved in all litigation involving
the estate. He maintained a detailed log on time spent on matters
relating to the estate. Mr. Glover estimated that he spent 1,858
hours on estate matters. He was not employed by the administrators
pro tem. or their law firm to assist them with estate matters.
- 25 -
OPINION
Section 2001(a) imposes an estate tax on the taxable estate of
every decedent who is a citizen or resident of the United States.
A decedent’s taxable estate is determined by determining the value
of the decedent’s gross estate and by deducting therefrom those
deductions provided for in sections 2053 through 2056. Sec. 2051.
The gross estate of a decedent is determined by including the value
(at the date of the decedent’s death) of the decedent’s interest in
all property, real or personal, tangible or intangible, wherever
situated. Secs. 2031(a), 2033.
In this case, one of the issues presented is determining (for
purposes of determining the value of decedent’s gross estate) the
value of an interest which decedent possessed in a malpractice
claim against Eckell, Sparks as of the date of her death. The
parties have fashioned a formula for computing the value of that
interest. They have agreed that the starting point in determining
the value of that interest is a post mortem settlement, made almost
9 years after decedent’s death. While normally we would not attach
such importance, if any, to an event or transaction occurring
almost 9 years after decedent’s death in determining a date-of-
death value for an asset owned by a decedent, in this case we do so
because of the parties’ stipulation.
Essentially, the parties have agreed that the $750,000
settlement represented the gross value as of the date of settlement
- 26 -
of all claims asserted against Eckell, Sparks. Accepting the
parties’ agreed $750,000 starting gross valuation for the claims,
we are asked by the parties to determine whether any portion of the
$750,000 starting point valuation is to be allocated to interests
that decedent did not possess at the date of her death.
Specifically, we decide whether any part of the $750,000 should be
allocated to the value of (1) the estate’s claim for the return of
the $247,50010 of legal fees paid by decedent’s estate for services
rendered in connection with the administration of decedent’s estate
and/or (2) claims of the residuary beneficiaries for malpractice;
and if so, the amount thereof. We must further decide whether
payments made by decedent’s estate to attorneys representing the
Glovers, as the residuary beneficiaries, and any possible future
payment by the estate to Mr. Glover for his efforts in discovering
the misappropriation of decedent’s assets by Ms. Hurley and Mr.
Ross are deductible either as administrative expenses pursuant to
section 2053(a)(2) or as claims against the estate pursuant to
section 2053(a)(3).
10
We use the $247,500 amount because, as indicated supra
note 2, the actual amount of fees paid and ordered returned to
the estate was $247,500. Additionally, this greater amount is
the amount used by both parties in their briefs.
- 27 -
Issue 1. Whether Portions of the $750,000 Settlement for Claims
Against Eckell, Sparks Are Attributable to the Value of
the Estate’s Claim for the Return of Attorney’s Fees That
the Orphans’ Court Ordered Returned to Decedent’s Estate
and/or Attributable to the Value of the Glovers’ Claims
Against the Firm
The administrators pro tem. and the Glovers filed a civil
action against Eckell, Sparks, alleging that Eckell, Sparks (1)
committed malpractice in connection with the drafting of decedent’s
will and antenuptial agreement (count I), as well as while
representing decedent’s estate (count III); (2) was liable for the
attorney’s fees incurred by the Glovers in contesting decedent’s
will (count II); (3) violated the RICO (count IV); and (4) was
liable for punitive damages (count V). The lower court dismissed
all counts either for lack of standing or for failure to allege
sufficient facts to support these claims. On appeal, the superior
court reversed and remanded the lower court’s dismissal of the
predeath malpractice claim against Eckell, Sparks by the
administrators pro tem. The superior court affirmed the order of
the lower court in all other respects.
On April 17, 2000, the Orphans’ Court, sua sponte, entered an
opinion and decree ordering Eckell, Sparks to repay the $247,500
the law firm had received from decedent’s estate. The trial of the
civil action brought by the administrators pro tem. against Eckell,
Sparks commenced in April 2000. In early May 2000 the
administrators pro tem., the Glovers, and Eckell, Sparks entered
into a settlement whereby Eckell, Sparks agreed to pay $750,000 for
- 28 -
the release of all claims asserted in both the civil action and the
will contest, which included the liability for the return of the
$247,500 of attorney’s fees.
Total litigation costs of $203,659 were incurred in the
action, resulting in a net recovery of $546,341. Pursuant to the
agreement between the estate and the Glovers, the estate’s 40-
percent portion of the net proceeds would be $218,536 (rounded).
The estate argues that the Glovers’ 60-percent share of the
settlement and the $247,500 of attorney’s fees that the Orphans’
Court ordered Eckell, Sparks to return to the estate should be
excluded from the $750,000 settlement that the parties stipulated
represents the starting point for determining the value of
decedent’s interest in the malpractice claim on the date of her
death.
For purposes of determining the value of a decedent’s gross
estate within the purview of section 2033, the term “property”
encompasses choses in action. United States v. Simmons, 346 F.2d
213 (5th Cir. 1965); Bank of Cal. v. Commissioner, 133 F.2d 428
(9th Cir. 1943), affg. in part and revg. in part Estate of Barneson
v. Commissioner, a Memorandum Opinion of this Court dated May 27,
1941; Estate of Curry v. Commissioner, 74 T.C. 540 (1980); Cobb v.
Commissioner, T.C. Memo. 1985-208; Estate of Aldrich v.
Commissioner, T.C. Memo. 1983-543; Estate of Biagioni v.
Commissioner, T.C. Memo. 1981-660; Duffield v. United States, 136
- 29 -
F. Supp. 944 (E.D. Pa. 1955). The contingent nature of a claim
bears on the question of the value of the claim, not on its
includability in a decedent’s gross estate. Estate of Curry v.
Commissioner, supra at 546.
Claims arising from events occurring after a decedent’s death,
(1) are those of the estate, (2) have not passed to the estate from
the decedent, and consequently, (3) are not included in the
decedent’s gross estate. Conn. Bank & Trust Co. v. United States,
465 F.2d 760 (2d Cir. 1972) (property interest arising after the
decedent’s death is not property owned at death and not part of the
gross estate under section 2033); Mandel v. Sturr, 266 F.2d 321 (2d
Cir. 1959).
In the case at hand, the malpractice action against Eckell,
Sparks that related to the law firm’s handling of decedent’s
affairs during her life is an interest that decedent possessed as
of the date of her death. However, that part of the malpractice
action relating to the return of the fees paid by the estate to
Eckell, Sparks during Ms. Hurley’s administration of the estate is
not an interest that decedent possessed on the date of her death
because it arose from events occurring and for services rendered
after decedent’s death. Any claim for such wrongdoings belongs to
the estate. Similarly, the value of any claim by the Glovers
against Eckell, Sparks is not included in decedent’s gross estate
- 30 -
because decedent possessed no interest in such a claim as of the
date of her death.
1. Fees of $247,500 Ordered by Court To Be Returned to
Estate
Respondent acknowledges that decedent’s gross estate should
not be increased by the return of the $247,500 of attorney’s fees
paid by the estate to Eckell, Sparks during the administration of
the estate, as ordered by the Orphans’ Court. Respondent contends,
however, that because the settlement agreement among the law firm,
the administrators pro tem., and the Glovers failed to allocate the
settlement among the estate’s cause of action for the return of the
fees, the Glovers’ claims, and decedent’s cause of action for
malpractice, there is no way of determining what part, if any, of
the $750,000 settlement represents repayment of the $247,500 in
attorney’s fees. We disagree.
When, as in this case, a settlement agreement does not
allocate the settlement among claims, the “intent of the payor” in
making the payment is an important factor in determining the
amounts properly allocable to the various claims. Knuckles v.
Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), affg. T.C. Memo.
1964-33; Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961),
affg. per curiam T.C. Memo. 1960-21; Metzger v. Commissioner, 88
T.C. 834, 847-848 (1987), affd. without published opinion 845 F.2d
1013 (3d Cir. 1988). If the payor’s intent cannot be clearly
discerned from the settlement agreement, the payor’s intent must be
- 31 -
determined from all the facts and circumstances of the case.
Factors to be considered include the details surrounding the
litigation in the underlying proceeding, the allegations contained
in the payee’s complaint and amended complaint in the underlying
proceeding, and the arguments made in the underlying proceeding by
each party. See, e.g., Estate of Morgan v. Commissioner, 332 F.2d
144, 150-151 (5th Cir. 1964), affg. in part and revg. in part 37
T.C. 31 (1961); Threlkeld v. Commissioner, 87 T.C. 1294, 1306
(1986), affd. 848 F.2d 81 (6th Cir. 1988); Bent v. Commissioner, 87
T.C. 236, 245 (1986), affd. 835 F.2d 67 (3d Cir. 1987). No single
factor is determinative; rather, in a given case, a factor may be
ignored or be deemed persuasive. Threlkeld v. Commissioner, supra
at 1306.
With these principles in mind, we analyze the Eckell, Sparks
settlement agreement.
First, we are mindful that respondent was not a party to the
lawsuit that resulted in the order of the Orphans’ Court requiring
Eckell, Sparks to return the $247,500 in attorney’s fees it
received from the estate. Therefore, res judicata or collateral
estoppel does not apply. Commissioner v. Estate of Bosch, 387 U.S.
456, 463 (1967). Second, the decision of the Orphans’ Court
requiring Eckell, Sparks to return the fees is not the decision of
the State’s highest court. Consequently, the Orphans’ Court’s
determination of Pennsylvania law is not per se conclusive for
- 32 -
Federal estate tax purposes. Id. at 465. But we should and will
give “proper regard” to the Orphans’ Court’s interpretation of
Pennsylvania substantive law. Id.
We believe that the order of the Orphans’ Court directing
Eckell, Sparks to repay the fees received from the estate had a
major bearing on the law firm’s decision to make the $750,000
settlement payment and that the order should be given significant
weight with respect to the apportionment of the settlement
proceeds. The $750,000 was intended to settle all claims made
against Eckell, Sparks, including the estate’s claim for the return
of the $247,500 of fees. Indeed, had Eckell, Sparks failed to
repay the entire $247,500, it would have been in contempt of the
order of the Orphans’ Court.
The totality of the uncontradicted evidence in this case
persuades us that it was the intent of Eckell, Sparks to have
$247,500 of the $750,000 settlement amount be for (and thus
$247,500 should be allocated to) the attorney’s fees that the
Orphans’ Court ordered be returned to the estate, leaving the
balance of the $750,000 settlement to be allocated among all other
claims involved in the proceedings. In this regard, we are mindful
that the $247,500 paid to Eckell, Sparks by the estate came from
funds that had been included in determining decedent’s gross
- 33 -
estate. Were we not to make this allocation, decedent’s gross
estate would be increased by the repaid fees, which in essence
would cause the $247,500 to be taxed twice.11
2. Amount Distributed to Glovers Under Plaintiffs’ Agreement
We now turn our attention to whether any part of the $750,000
settlement should be allocated to the Glovers’ claim, which would
have the effect of reducing decedent’s interest in the malpractice
claim.
The only claim made in the lawsuit that relates specifically
to the Glovers (rather than to Eckell, Sparks’s malpractice in the
preparation of the will or in connection with the administration of
the estate) is count II. In count II, the plaintiffs claimed that
Eckell, Sparks was liable for $340,270, together with interest and
costs for attorney’s fees incurred by the Glovers in contesting
decedent’s will. The trial court dismissed this claim, with
prejudice, finding that the Glovers lacked standing to assert the
claim. The court additionally found that the claim could not be
asserted separately but rather was a component of the damages
resulting from the malpractice, if any, committed by Eckell, Sparks
in preparing the will. (Damages resulting in the malpractice, if
any, committed by Eckell, Sparks in preparing decedent’s will
11
Decedent’s estate agrees that attorney’s fees of
$247,500 paid to Eckell, Sparks that the Orphans’ Court ordered
be returned to the estate are not deductible as administrative
expenses under sec. 2053(a)(2).
- 34 -
constituted a claim that decedent possessed at the date of her
death. And, as noted previously, the value of any such claim is
included in decedent’s gross estate. (But see infra pp. 40-51 for
deduction of attorney’s fees as an administration expense under
section 2053(a)(2).) Although the decision of the superior court
is not the decision of the State’s highest court, and hence is not
per se conclusive for Federal income tax purposes, we should and
will give proper regard to the superior court’s interpretation of
Pennsylvania substantive law.
Aside from the $247,500 which the Orphans’ Court ordered
returned to the estate, the evidence convinces us that no portion
of the $750,000 settlement amount should be allocated to the value
of any matter other than the malpractice claim that decedent
possessed at the date of her death. We do not believe that the
Glovers had any meritorious claims against the law firm in their
own right. To the contrary, the dismissal of all claims asserted
by the Glovers against Eckell, Sparks (on the grounds that the
Glovers lacked standing to bring any claims) is strong indication
that the value of the Glovers’ claims was negligible at best.
As stated, the parties stipulated that the $750,000 settlement
represents the starting point in determining the value of
decedent’s interest in the malpractice claim as of the date of
decedent’s death. We therefore hold that $502,500 ($750,000 less
$247,500 allocated to the return of fees) is the gross value of
- 35 -
decedent’s interest in the malpractice claim against Eckell,
Sparks. Pursuant to the parties’ agreement, this $502,500 should
be reduced by $203,659 for legal costs in prosecuting the
malpractice, leaving a net value of $298,841. Pursuant to the
parties’ agreement, we next must multiply the $298,841 net amount
by .438233 (the present value factor), leaving $130,962 (rounded)
as the value of decedent’s interest in the malpractice claim as of
the date of death.
Issue 2. Whether That Portion of the Proceeds From the Settlement
of Claims Against the Law Firm of Eckell, Sparks Paid to
the Residuary Beneficiaries Is a Deductible Expense in
Determining Decedent’s Taxable Estate
Decedent’s estate argues that, if we determine that no portion
of the $750,000 settlement is allocable to the Glovers’ claim, then
the portion (60 percent) of the Eckell, Sparks settlement proceeds
payable to the Glovers pursuant to the plaintiffs’ agreement is
deductible (in determining decedent’s taxable estate) either as an
administration expense within the meaning of section 2053(a)(2) and
section 20.2053-3(c)(3), Estate Tax Regs., or as a claim against
the estate within the meaning of section 2053(a)(3) and section
20.2053-1(a)(1), Estate Tax Regs. We disagree.
An estate may deduct as claims against the estate only those
claims that are “enforceable against the decedent’s estate” and
only those amounts that “represent personal obligations of the
decedent existing at the time of his death”. Sec. 20.2053-4,
Estate Tax Regs. The plaintiffs’ agreement was not an obligation
- 36 -
of decedent existing at the date of her death. Therefore, the 60
percent of the settlement proceeds payable to the Glovers under
that agreement is not deductible as a claim against the estate
within the meaning of section 2053(a)(3).
Moreover, when founded on a promise or agreement, the
deduction for a claim against an estate is allowed only to the
extent that the claim was contracted bona fide and for an adequate
and full consideration in money or money’s worth. Sec.
2053(c)(1)(A); sec. 20.2053-4, Estate Tax Regs. The “bona fide”
and “consideration” elements in section 2053(c)(1)(A) are related
but separate requirements; and if either is missing, the deduction
fails. Estate of Scholl v. Commissioner, 88 T.C. 1265, 1279
(1987). The requirement of an adequate and full consideration in
money or money’s worth may not be predicated solely on the fact
that the contract is enforceable under State law. United States v.
Stapf, 375 U.S. 118, 130-131 (1963). The requirement of
“‘consideration in money or money’s worth’ * * * invokes a higher
standard of consideration than that required to establish the
validity of a contract under State law”. Estate of Carli v.
Commissioner, 84 T.C. 649, 658 (1985).
A State trial court decree having Federal estate tax
implications does not automatically bind the Commissioner if the
Commissioner was not a party to the proceeding. Commissioner v.
Estate of Bosch, 387 U.S. 456 (1967); Estate of Rowan v.
- 37 -
Commissioner, 54 T.C. 633, 636-637 (1970). This principle applies
specifically to the estate tax deductibility of items listed in
section 2053(a), including administrative expenses and claims
against the estate. United States v. White, 853 F.2d 107, 113-115
(2d Cir. 1988); Estate of Lewis v. Commissioner, 49 T.C. 684, 688
(1968).
Section 20.2053-1(b)(2), Estate Tax Regs., describes how a
court decree affects estate tax deductions under section 2053(a):
The decision of a local court as to the amount and
allowability under local law of a claim or administration
expense will ordinarily be accepted if the court passes
upon the facts upon which deductibility depends. If the
court does not pass upon those facts, its decree will, of
course, not be followed. For example, if the question
before the court is whether a claim should be allowed,
the decree allowing it will ordinarily be accepted as
establishing the validity and amount of the claim.
However, the decree will not necessarily be accepted even
though it purports to decide the facts upon which
deductibility depends. It must appear that the court
actually passed upon the merits of the claim. This will
be presumed in all cases of an active and genuine
contest. If the result reached appears to be
unreasonable, this is some evidence that there was not
such a contest, but it may be rebutted by proof to the
contrary. If the decree was rendered by consent, it will
be accepted, provided the consent was a bona fide
recognition of the validity of the claim (and not a mere
cloak for a gift) and was accepted by the court as
satisfactory evidence upon the merits. It will be
presumed that the consent was of this character, and was
so accepted, if given by all parties having an interest
adverse to the claimant. The decree will not be accepted
if it is at variance with the law of the State; as, for
example, an allowance made to an executor in excess of
that prescribed by statute. On the other hand, a
deduction for the amount of a bona fide indebtedness of
the decedent, or of a reasonable expense of
administration, will not be denied because no court
- 38 -
decree has been entered if the amount would be allowable
under local law.
Clearly, if a local court does not adjudicate the merits of a
claim, which typically would be the case in a nonadversarial
proceeding, the presumption that the decision of the local court on
allowability “will ordinarily be accepted” does not apply. Wolfsen
v. Smyth, 223 F.2d 111, 113-114 (9th Cir. 1955); First-Mechanics
Natl. Bank v. Commissioner, 117 F.2d 127, 129-130 (3d Cir. 1940),
affg. 40 B.T.A. 876 (1939); sec. 20.2053-1(b)(2), Estate Tax Regs.
To this end, in this case, a State court has not made an
independent review of the proposed allocation of the settlement of
the Eckell, Sparks malpractice case as set forth in the plaintiffs’
agreement. But the State courts did find that the Glovers lacked
standing with respect to all claims made against Eckell, Sparks.
The Glovers and the administrators pro tem. were not
adversaries with respect to the claims against Eckell, Sparks, the
dollar amount contained in the settlement agreement, or the
allocation memorialized in the agreement between the Glovers and
the administrators pro tem.
Decedent’s estate would face additional hurdles even if the
record did show that a State court had passed on the merits of the
claims and that the highest court of Pennsylvania would allow the
claims against the estate. Section 20.2053-1(b)(2), Estate Tax
Regs., is to be construed in harmony with section 2053(c)(1)(A),
which requires claims founded on a promise or agreement to be
- 39 -
“contracted bona fide and for an adequate and full consideration in
money or money’s worth”. As noted heretofore, “adequate and full
consideration” for purposes of section 2053(c)(1)(A) is a higher
standard of consideration than that required to establish the
validity of a contract under State law. Estate of Carli v.
Commissioner, supra. The record is devoid of any evidence that the
Glovers’ claim for 60 percent of the settlement proceeds was
contracted for an adequate and full consideration in money or
money’s worth. Indeed, aside from dubious RICO claims and claims
for punitive damages, the damages related to the Glovers’ claims
against Eckell, Sparks (attorney’s fees of $340,270, together with
interest and costs) are substantially less than the damages related
to decedent’s claims and those of the estate (e.g., over $1 million
related to the claim of malpractice in preparing the will). To be
deductible as an administration expense, the regulations require
that the payment to the Glovers must have been “essential to the
proper settlement of the estate”. Sec. 20.2053-3(c)(3), (a),
Estate Tax Regs. We do not find that the payment to the Glovers
was essential to the proper settlement of the estate. In
considering this matter, we are mindful that it is the duty of an
administrator to collect and protect assets of the estate.
There is no indication that the specific bequests in
decedent’s will to beneficiaries other than the Glovers could not
be satisfied with the assets in decedent’s estate if the claims
- 40 -
against Eckell, Sparks failed. Any recovery by the administrators
pro tem. would devolve to the Glovers as the residuary
beneficiaries. All the claims raised in the suit were claims that
belonged to either decedent or the estate. The 60/40 division,
instead of reflecting the merits of the coplaintiffs’ respective
claims, was in essence a vehicle for reducing the gross estate by
channeling to the Glovers funds that would go to them anyway as
residuary beneficiaries. We hold, therefore, that the Glovers’
claim for 60 percent of the settlement proceeds is not deductible
as a claim against the estate or deductible as an administration
expense.
Issue 3. Whether Payments Made by Decedent’s Estate to Attorneys
Representing the Residuary Beneficiaries or To Be Paid to
Mr. Glover for His Efforts in Discovering the
Misappropriation of Decedent’s Assets by Ms. Hurley and
Mr. Ross Are Deductible as Administrative Expenses
Pursuant to Section 2053(a)(2) or as Claims Against the
Estate Pursuant to Section 2053(a)(3)
Decedent’s estate argues that the payments it made to the
Glovers’ attorneys and any payments it will make to Mr. Glover for
his efforts in discovering the misappropriation of decedent’s
assets by Ms. Hurley and Mr. Ross constitute administration
expenses within the meaning of section 2053(a)(2) and section
20.2053-3(c)(3), Estate Tax Regs.
For estate tax purposes, the value of the gross estate is
reduced by amounts incurred for “administration expenses” that are
allowable by the laws of the jurisdiction under which the estate is
- 41 -
being administered. Sec. 2053; Estate of Swayne v. Commissioner,
43 T.C. 190 (1964). The amounts deductible as administration
expenses are limited to such expenses as are actually and
necessarily incurred in the administration of the decedent’s
estate. Sec. 20.2053-3(a), Estate Tax Regs. Expenditures not
essential to the proper settlement of the estate but incurred for
the individual benefit of the heirs, legatees, or devisees are not
allowed as deductions. Id. Further, attorney’s fees incurred by
beneficiaries incident to litigation as to their respective
interests are not deductible if the litigation is not essential to
the proper settlement of the estate. Sec. 20.2053-3(c)(3), Estate
Tax Regs.
Respondent concedes that the services provided by Mr. Glover
and the Glovers’ attorneys led to the discovery of Ms. Hurley’s
misappropriation and the Eckell, Sparks malpractice, and the
removal of Ms. Hurley as executrix. Respondent also agrees that
the services were essential to the proper settlement of the estate.
Respondent argues, however, that services provided by the attorneys
for the Glovers’ will contest and for the attorneys’ involvement in
the malpractice litigation were unnecessary to the settlement of
the estate and were primarily for the personal benefit of the
Glovers. Furthermore, respondent contends that the record in this
case does not establish the portion of the fees allocable to the
- 42 -
various services provided, and, therefore, no portion of the fees
should be allowed as a deduction. Respondent concludes, therefore,
that the fees for those services are not deductible.
In the case at hand, we are satisfied that payment of a
portion of the Glovers’ attorney’s fees incurred in the will
contest and payment of reasonable compensation to Mr. Glover for
services he provided to the benefit of the estate are permitted
under Pennsylvania law. In considering this matter, we are mindful
that it is the duty of an administrator to collect and protect the
assets of the estate and that the administrator is justified in
employing an attorney or other third parties to assist the
administrator in collecting or protecting the assets of the estate.
Under Pennsylvania law, the exceptant to the account of an
administrator ordinarily must pay his own counsel fees. In
exceptional cases, however, the exceptant may be allowed counsel
fees payable out of estate funds. In re Estate of Lux, 389 A.2d
1053 (Pa. 1978). Where the efforts of an exceptant and his counsel
result in the substantial benefit to the estate, such as requiring
an administrator to include in the inventory of the estate valuable
assets previously not included, it is within the discretion of the
Orphans’ Court to compensate the exceptant and his counsel out of
estate funds. Id.; see also In re Estate of Vaughn, 461 A.2d 1318,
1320 (Pa. Super. Ct. 1983).
[D]enial of compensation for * * * [the exceptant’s]
attorney’s fees out of estate funds * * * [would] permit
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the other heirs, who have never filed exceptions, to reap
the benefits of the efforts of * * * [the exceptant’s]
counsel without having to share in the expense of
producing those benefits. This would be a manifestly
unreasonable and inequitable result. * * *
In re Estate of Vaughn, supra at 1320; see also Commonwealth ex
rel. Hensel v. Order of Solon, 44 A. 327, 328 (Pa. 1899) (where the
attorney of one of several parties, all equally interested, secures
a fund which would otherwise have been misappropriated or lost, and
all share equally in the distribution, it is but equitable that all
should share in the expense which produced the fund, although but
one moved in the matter). “Under the circumstances * * * [the
beneficiary] must be allowed reasonable counsel fees out of the
estate funds.” In re Estate of Vaughn, supra at 1321.
We conclude that under Pennsylvania law, Mr. Glover would be
entitled to reasonable compensation for services he rendered for
the benefit of the estate. See, e.g., id. at 1320 (where the
executor, a beneficiary of the estate, expended extra effort in a
role separate and distinct from his role as executor, he was
entitled to fair and reasonable compensation for his additional
services). Paying a beneficiary, instead of a third party, for
services rendered is not unfair to the estate. Id.
“In Pennsylvania, the test for determining the appropriateness
of the fees charged for services rendered in the administration of
an estate has always been ‘reasonableness’.” Estate of Phillips,
616 A.2d 667, 668 (Pa. Super. Ct. 1992) (citing In re Estate of
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Burch, 586 A.2d 986, 987 (Pa. Super. Ct. 1991)). We are of the
opinion that a Pennsylvania court would uphold the estate’s payment
for Mr. Glover’s services if there is sufficient evidence to
conclude that the payment was fair and reasonable even though Mr.
Glover was a beneficiary of the estate. See, e.g., Estate of Getz,
618 A.2d 456, 460-462 (Pa. Super. Ct. 1992); In re Estate of
Vaughn, supra at 1320.
The services rendered by Mr. Glover and his attorneys resulted
in the recovery of a significant sum for the estate. Consequently,
we find it is proper for the administrators pro tem. to pay from
estate funds the fees for services rendered before the Orphans’
Court removed Ms. Hurley as executrix and appointed the
administrators pro tem. See, e.g., Estate of Bruner, 691 A.2d 530,
535 (Pa. Super. Ct. 1997); In re Estate of Vaughn, supra. Indeed,
respondent acknowledges that the amount incurred for services
rendered before that time by Mr. Glover’s attorneys is $91,192.
A beneficiary who seeks compensation has the burden of
demonstrating that the amount requested is just and reasonable. In
re Estate of Salus, 617 A.2d 737, 742-743 (Pa. Super. Ct. 1992);
Estate of Phillips, supra. The Orphan’s Court can fashion an award
of just and reasonable compensation provided there is evidence of
the services provided. But when the compensation awarded is
without support in the record, the award cannot stand. In re Reed
Estate, 341 A.2d 108 (Pa. 1975).
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Mr. Glover has asked the estate to compensate him for 1,858
hours of his services at the rate of $90 per hour for total
compensation of $167,220. He provided time records showing the
dates he worked on matters related to the estate and the time he
expended on those matters. Mr. Holleran testified at the trial in
this case that the time Mr. Glover expended in reconstructing
decedent’s accounts and tracking the funds misappropriated by Ms.
Hurley and Mr. Ross provided substantial benefit to the estate.
Mr. Holleran’s testimony was uncontroverted. Mr. Glover, however,
did not testify at the trial in this case, and the time records he
provided to Mr. Holleran generally reflect activity commonly
associated with the activities of a party to litigation, e.g.,
meetings and conversations with his attorneys and preparation for
and attendance at depositions and hearings. Upon reviewing Mr.
Glover’s time records, we are convinced that most of the time for
which he seeks compensation was expended in pursuing his challenge
of the validity of the will and specifically the bequest resulting
from the interlineation that gave the farm to the Pierces and the
bequest of $1 million to the University of Pennsylvania. However,
284.15 hours of Mr. Glover’s time (detailed as follows) is
attributable to reconstructing decedent’s accounts and tracking the
funds misappropriated by Ms. Hurley and Mr. Ross, and we therefore
hold that the amount for these services is deductible:
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Date Description Hours Claimed
9/4/91 Conv. w/Joe Monte on estate accts; Pierce loan,
back taxes due .50
9/26/91 Meet w/Hurley; Change of will, unpaid tax 2.00
10/18/91 Ltr. to Lynn Hurley on missing personal items .50
2/20/92 Conv. w./Tracy on procedure to object to account,
Endy’s decree; fax decree to Tracy .33
4/6/92 Mtg. w/Monte on Margin acct., etc. 2.25
7/13/92 Hurley; Jayne K, investment of est. assets, acctg. .33
7/15/92 Langdon; Ross .50
10/14/92 Skinner; Ross, Hurley, recordkeeping, his work .50
11/18/92 Send fax to Craig; Conv w/Skinner on work, tax
returns 2.25
11/19/92 Cheltenham Bank; FCG, Ross’s business .50
1/4/93 Skinner; On Ross, taxes, etc. .66
1/5/93 Langdon; Hurley Ross history; conv. w/Jayne on same
Thomson’s address 1.25
1/13/93 Prep. for deposition; review Langdon info.; Conv.
w/Thomson, FCG, Farm, Ross, Hurley, etc. 1.66
1/15/93 Dr. Morgan; FCG health; Mtg w/Skinner; review
records of returns, extensions, etc. 4.33
1/23/93 Bill Thomson; Ross, Ice Cream B, records, etc.;
review of Eckell docs. 4.50
1/24/93 Create summary of funds wired from brokerage accts. 2.50
2/2/93 Skinner; background info. .50
3/4/93 Fax to Craig on Wilm Trust checks to Pierces; Conv.
w/Craig; Review checks, etc. 2.25
3/4/93 Review Comm Fed checks for 14170; Tabulate a
summary of noteworthy checks 4.50
3/5/93 Catalogue checks 4.50
3/5/93 Ltr & fax to Craig & Guy on initial results of
reviewing FCG’s Comm Fed acct 14170 2.50
3/8/93 Ltr to Gordon & Katherine explaining that initial
review of Comm Fed checks reveal theft; research 6.50
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Date Description Hours Claimed
4/16/93 Conversation w/Clearwater records; summarize Wilm.
Trust checks 6.75
4/16/93 Enter Comm. Fed checks from both accts into framework
spreadsheets 8.50
4/17/93 Summarize Comm. Fed checks and contrast w/Hurley
deposition 6.50
4/18/93 Finish drafting memo contrasting Hurley’s depo to
financial records; mail to Craig 8.50
4/20/93 Further review of Comm Fed checks; Ltr to Alice
Bucha on missing cks; Ltr listing accts involved
w/FCG 3.00
4/21/93 Review summary w/Tracy, conver w/Craig; Send
summary of Comm Fed accts to G&K 2.25
5/6/93 Fax to Craig listing accts; Comm Fed representative
needed to identify .50
5/13/93 Meet w/Craig & Guy; review checks 4.00
5/14/93 Transfer spreadsheet info to Excel; Update summary;
review cks w/Craig 7.00
5/17/93 Review cks w/Craig 2.50
6/1/93 Update spreadsheets on Comm Fed accts incorporating
Hurley testimony; Conv. w/Craig 2.50
6/10/93 Meet w/Gordon & Craig in prep for hearing; Create
flow chart for FCG’s Comm Fed accts. 10.75
6/11/93 Meet w/Craig & Guy to prepare for hearing;
finalize flow chart, summaries 12.25
7/14/93 Review Fidelity checks w/Craig 1.00
7/19/93 Conv. w/Mark; Answer Mark’s questions on accounts;
hear estate position .50
7/22/93 Conv. w/Craig & Mark; request Hurley be dismissed
from U.P. Trust, include Ross in complaint, review
administrator position .50
7/22/93 Copy & send Mark T. brokerage records w/summaries 1.50
7/28/93 Begin to tabulate Fidelity estate acct checks 2.00
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Date Description Hours Claimed
7/29/93 Tabulate & review est acct chks, draft list of accts
to investigate, prepare for will contest, Eckell
claim 5.75
8/2/93 Ltr to Mark T & Craig on Fidelity Bank accts. 1.00
9/20/93 Review of Fidelity cks sent by Mark Tunnell; ltr. to
Baumeister w/copy of adm. complaint 2.50
9/21/93 Review of Fidelity cks; summary ltr to Tunnell 3.20
10/29/93 Prepare summary of Lynn’s sch of assets; fax to Mark
& Craig on Ms. Hurley’s sch of assets 1.75
11/9/93 Review Merrill CMA’s & Comm. accts of Hurley &
friends; begin summary ltr. 6.00
11/10/93 Finish reviewing accts, ltr to Tunnell, fax Bucha 3.00
11/12/93 Review Fidelity accts, ltr to Tunnell; review estate
acct w/D. Scarlett 1.50
11/21/93 Review Del Trust statements 1.00
11/22/93 Review Fidelity accts, Com Fed accts, docs for
Hurley’s deposition 6.50
11/23/93 Review Fidelity accts, Com Fed accts, docs for
Hurley’s deposition 9.10
12/31/93 Summary of ‘85 & ‘86 wires, create flow chart; review
acctg, ltr to Craig, copy to Mark 5.50
1/21/94 Review info on Hurley/Ross jt acct w/Craig & R III;
general review 5.25
1/22/94 Summarize inflows of Del Trust acct per Tunnell’s
request; conv. w/Mcllvane 5.50
1/23/94 Summarize inflows in letter to Tunnell 6.75
2/15/94 Prepare for trial w/Craig & Guy; dinner w/Hurley 8.00
3/9/94 Finish fax of revision to brief, fax to Tracy; review
Hurley accts 13669 & 14196, fax to Bucha 6.25
3/10/94 Review Hurley accts 14196 & fax Bucha 3.10
3/16/94 Review Comm accts summaries; prepare for case 3.10
3/21/94 Review courts checks, compare to summary, amend
summary, prepare exhibts, etc. 9.50
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Date Description Hours Claimed
9/30/94 Review Hurley Merrill statements; fax to Craig 1.50
12/29/94 Review w/Boulden Hurley & Ross’s various Co’s.;
Mail copies of Emper’s notes & litigation on same;
review Boulden’s fax 3.75
1/6/95 Rev Boulden’s ltr to Heckshire; FedEx info on appeal;
copy & mail Hurley test. & sch. of assets to Tunnell
as requested 6.50
3/3/95 Review Boulden’s complaint, Heckscher ltr; begin to
review Hurley pers. accts for Lubline 4.50
3/4/95 Copy cks, transcript records for Lubline 1.75
3/5/95 Copy records showing Hurley’s use of funds on RE for
Lubline, enter into spreadsheet & ltr. 6.33
3/8/95 Review complaint, answer Boulden’s ques.; Review ES
docs; Search for Del Trust cks, fax to Tunnell Hurley
questions 5.25
6/8/95 Discuss settlement w/Hurley & Jim Draper; inform
Tunnell & Lubline .75
7/18/95 Review settlement agree, review Hurley’s schedules;
discuss w/Boulden, review w/Tunnell 1.50
8/22/95 Discuss settlement w/Hurley, Draper & Tunnell 1.25
8/23/95 Rev settlement w/Lubline; Request Holleran to buy
mtge on RD 6, discuss Pierce case w/Tunnell;
discuss settlement w/Hurley 1.60
11/21/96 Per Boulden’s request, review Skinner, Newton &
Enbon notes; Hurley notes 1.75
2/7/97 Assemble & organize docs per Boulden’s request for
acct & Eckell suit 5.50
8/4/98 Conv w/Heckshire’s off; cpy PA & Fed estate & local
tax returns and FedEx 1.75
10/21/98 Answer Ferrone’s Qs on Orphans Ct rept; copy joint
prop section of estate tax return & bank accts 2.25
10/23/98 Review Orphan’s Ct record, Eckell records, FCG’s
checking acct; fax Ferrone 1.33
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Date Description Hours Claimed
11/6/98 Review Heckshire’s rept; answer Ferrone’s quest;
per Ferrone request, copy FCG/Hurley jt acct &
estate acct statements 1.33
11/10/98 Per Ferrone’s request, review date of death brokerage
accts to determine how 50,000 wire was accounted for;
fax to Ferrone 1.00
11/17/98 Per Holleran’s request, copy & mail docs re: Eckett’s
account & estate tax returns 2.00
1/7/99 Find, review & copy docs to respond to Eckell’s
interrog.; review Hurley’s financial records 5.50
1/8/99 Finish copying Hurley’s financial records, take all
copies out for reproduction, draft answer for
interrog. 3.75
6/30/99 Conv: Tunnell on adjudication of acct schedule for
civil case 1.20
4/17/00 Per Tunnell’s request, review the check summaries
made for case against will .75
4/18/00 Per Tunnell’s request, get copies of check summaries
diagrams, etc.; per Farrone’s request, review Cloud
& Carter’s testimony 1.30
Total 284.15
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Mr. Holleran testified that Mr. Glover’s services were
comparable in value to the services of a paralegal and that
reasonable compensation for those services is $90 per hour. On
the basis of the record before us, we conclude that it is just and
reasonable for the estate to deduct, as an administrative expense
pursuant to section 2053(a)(2), $25,574 ($90 x 284.15 (rounded))
for services rendered by Mr. Glover, provided the payment for that
amount (or greater) is approved by the Orphans’ Court. In re
Estate of Salus, 617 A.2d 737 (Pa. Super. Ct. 1992); Estate of
Phillips, 616 A.2d 667 (Pa. Super. Ct. 1992). On the other hand,
we conclude the estate is not entitled to deduct any amount in
excess of $25,574 for the remainder of Mr. Glover’s time because
any excess would be unrelated to the reconstruction of decedent’s
accounts or the illegal activities of Ms. Hurley and Mr. Ross.
Conclusion
In summary,
(1) The value of decedent’s interest in her malpractice
claim against Eckell, Sparks as of the date of her death is
$130,962.
(2) The estate is entitled to deduct $91,192 of the Glovers’
attorney’s fees paid by the estate, and $25,574 for services of
Mr. Glover, provided the payments for these items (in the
aforementioned amounts or greater) are approved by the Orphans’
Court.
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To reflect the foregoing,
Decision will be entered
under Rule 155.